Thursday, June 14, 2012

Incomes, Governance And The Middle Class

A new working paper from the World Bank looks at the impact of the middle class on public policies (abstract; emphasis added):

Do middle classes bring institutional reforms?
Author: Loayza, Norman; Rigolini, Jamele; Llorente, Gonzalo;

Summary: The paper examines the link between poverty, the middle class and institutional outcomes using a new cross-country panel dataset on the distribution of income and expenditure. It uses an econometric methodology to gauge whether a larger middle class has a causal effect on policy and institutional outcomes in three areas: social policy in health and education, market-oriented economic structure and quality of governance. The analysis find that when the middle class becomes larger (measured as the proportion of people earning more than US$10 a day), social policy on health and education becomes more progressive, and the quality of governance (democratic participation and official corruption) also improves. This trend does not occur at the expense of economic freedom, as a larger middle class also leads to more market-oriented economic policy on trade and finance. These beneficial effects of a larger middle class appear to be more robust than the impact of lower poverty, lower inequality or higher gross domestic product per capita. That may be linked to the evolution of the middle class: they are more enlightened, more likely to take political actions and have a stronger voice. They also share preferences and values for policy and institutional reforms, as well as higher stakes in property rights and wealth accumulation.

I don’t think this paper will stop the debate over which comes first – the chicken, or the egg? Or in this case, democracy and governance, or incomes? But it’s more firmly on the side of incomes and income distribution coming first, or to be more precise, to demonstrate that incomes and income distribution do have a causal effect on policies and governance.

What differentiates this paper from others in the field is a unique dataset that involves segregating out middle class incomes from aggregate incomes (technically, all those not “at risk” of poverty), and isolating its effect. Note that while the impact is greater than that of poverty measures, overall incomes (GDP per capita) or income inequality, all these other measures have similar causal links as well.

A general conclusion would be that income and the distribution of income leads to better policies and governance. This is surprisingly still controversial for some. To be fair however, the methodology used in this paper only examines causality going one way, and there’s no attempt to look at two-way causality. So I suspect there’s still no settling this particular debate.

Technical Notes

Loayza, Norman and Jamele Rigolini & Gonzalo Llorente, "Do Middle Classes Bring Institutional Reforms?", World Bank Policy Research working paper, no. WPS 6015, June 2012

1 comment:

  1. I'm more on the side of income coming first. One has more pressing things to worry about, especially when he is starving :)